The Pearson Charitable Foundation will pay $7.7 million in a settlement with New York state, which accused it of improperly using assets to benefit Pearson Inc., its affiliated for-profit education company.

Digital content and course materials designed to align with the Common Core State Standards, developed through the foundation’s efforts, were central to the investigation led by New York Attorney General Eric T. Schneiderman.

“The law on this is clear: Nonprofit foundations cannot misuse charitable assets to benefit their affiliated for-profit corporations,” Schneiderman said in a statement. The settlement “revealed misuse of charitable assets by Pearson Charitable Foundation in a manner that benefited Pearson Inc.,” violating two state laws.

In the settlement papers released on Dec. 11, Pearson and its foundation “neither admit nor deny the [attorney general’s office’s] findings … and deny any violation of law in this matter.” The settlement document was signed by the president of the foundation and a senior vice president at Pearson.

“Pearson and the foundation maintain we have always acted with the best intentions and complied with the law,” the foundation said in a statement it issued on Dec. 12. “However, we recognize there were times when the governance of the foundation and its relationship with Pearson could have been clearer and more transparent.”

The state maintained that Pearson Inc. provided “substantial funding” to the foundation for its common core offerings to attract support from a “prominent” foundation that supported the standards, and “credibility for its commercial products,” according to the state.

In fact , in 2011 the Bill & Melinda Gates Foundation dedicated $3 million to support the Pearson Foundation’s work in creating 24 online reading and math courses aligned with the common core. (The Gates foundation also provides support for Education Week’s coverage of K-12 industry and innovation.)

All along, Pearson Inc. and its foundation planned that the courses developed would be sold commercially by Pearson Inc., according to the state. “Internal business analyses prepared by Pearson Inc. projected that potential profits from sales of the courses and related offerings could be in the tens of millions of dollars,” the state indicated in its release.

In June 2012, the Pearson Foundation’s board ratified the sale of the partially developed courses at a price of $15.1 million—a transfer that subsequently took place, the attorney general indicated.

These assets are part of the curriculum that was eventually loaded onto the iPads sold to the Los Angeles Unified School District earlier this year, although the amount paid to Pearson for the digital content has yet to be disclosed. Apple signed a $30 million contract in July for the first phase of the plan to put an iPad in the hands of every LAUSD student—an ambitious plan that is now on hold.

The state’s investigation also questioned the relationship between the foundation and Pearson in the International Summits for educators conducted by the foundation between 2008 and 2011. Held abroad, these programs were attended by state education officials, and international education officials, with travel and lodging expenses paid by the foundation. Once at the summits, the only representation of for-profit companies was by Pearson.

Under the terms of the settlement, $7.5 million will be directed to recruiting and retaining high-quality kindergarten through 12th grade teachers. Another $200,000 will reimburse the state for its expenses in the matter.

The foundation has also agreed to change its program and governance “to ensure that charitable assets of the foundation are not improperly used for the private benefit of Pearson Inc.,” the state’s office indicated in its statement.

Pearson said in its statement that the governance changes are already underway: “Over the past two years, the foundation has taken several steps to strengthen its governance, beginning with the addition of independent directors to the board and the adoption of stronger operational systems. Under the settlement, these efforts will be further enhanced by the creation of a three-person audit committee.”

This blog post has been updated to include a statement released by the Pearson Foundation.

Michele Molnar is associate editor of EdWeek Market Brief. She is also a reporter who covers industry and innovation for Education Week. Michele began working as a contributing writer for Education Week in 2012, covering parents' influence on education. She joined the staff in 2013 to write about the intersection of education and business in the pre-K-12 marketplace.

These connections between corporate educational foundations and their for-profit businesses come to light in this situation. The non-profits are pushing policies that will improve the market for their for-profit arm. The education-industrial complex at work!